I believe that a small universe of experienced and well educated investment professionals using a disciplined process and sophisticated analytical tools can consistently add value to client portfolios.
At the core of Bluemound adding value to client portfolios is protecting existing values. In short, we pay special attention to Warren Buffett’s first two rules of investing:
“Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1.”
Whether we are using our tactical asset allocation strategies to manage risk while maintaining upside for accumulated wealth or taking a more aggressive approach in my Punch Card Stock Portfolio, we first seek to find a margin of safety.
My philosophy and methodology do not generally coincide with the approach taken by most investors. Usually, the mass media, public at large and too many financial advisers are most interested in “hot” or “in the news” ideas which leads them to be emotional and unfocused. I seek a less emotional and more analytic approach to investing.
“Wide diversification is only required when investors do not understand what they are doing.”
Many investors have fallen for the repeatedly failed idea that mutual funds are an effective way to manage risk. See the results of most mutual funds from 2000 to 2002, and again in 2008. Were you happy riding out those waves of financial destruction and losing five calendar years because somebody told you that you were diversified?
Most people, advisers included, do not understand what diversification really is. The end result is that most people end up taking far more risk than they intended and suffering significant losses during market corrections.
I believe that diversification is not defined by asset class or holding, but rather, by risk factors. All assets that are affected by similar risk factors are correlated, therefore, those assets, no matter how many you own, do not offer adequate protection. Only by managing risk by risk factor, do you find the safety you truly seek.
As a result of our risk management approach, there are times, for the sake of safety, which we are very un-diversified. For example, we can and have moved most of our assets to cash holdings during times of excessive market risk.
While being extremely heavy in cash is only advisable from time to time, having the option of investing when everybody is selling and driving asset prices down generally leads to wonderful outcomes. Imagine if you had sold many of your stock market holdings in 2007 and had cash on hand to cherry pick as Buffett did in 2008 and 2009. This idea of cash and risk management has been called “optionality” by one of today’s top authors and it is very important to consider it whenever you invest hard earned money. Our tactical methodology allows us to avoid much downside and participate in upside.
“We just throw some decisions into the ‘too hard’ file and go onto others.”
Charlie Munger (Buffett’s partner at Berkshire Hathaway)
Another of the biggest mistakes that investors and advisers make is trying to be right too often. The better approach is to look for less difficult decisions and only make investments then. Other times, simply walk away, there will be another chance later. Avoid “hero” decisions and simply make a series of easier decisions that have a high probability of working out.
In both our tactical asset allocation strategies and our concentrated stock portfolio, we often find ourselves sitting on the sidelines as we wait for less dangerous opportunities. Because of this cautious approach to investing we will not always beat a portion of a market cycle — generally the end of up markets. However, I am very comfortable and confident that we will beat most complete market cycles when all is said and done due to avoiding large losses. To paraphrase Munger again, “I take the cautious approach and that seems to work out pretty well.”
What Bluemound and I Will Do For You
I am always cognizant of the advice that my first landlord gave me, “Kirk, if you want to learn how to do something, learn from people who have already done it.” In managing money, I look to the great investors for guidance and direction, not the financial industry sales machine.
I partner and consult with several other top investment professionals. We support each other’s research and challenge each other to find ideas that lower risk while allowing for return. I will offer to be your funnel for finding the right investments for your portfolio.
For more information and to discuss how my approaches can benefit you, please email meor call Bluemound at 1–855-445‑4321.